New Zealand inflation was a donut

New Zealand consumer price inflation (CPI) came in flat for the June quarter, missing expectations for an increase of 0.2%.

It was the weakest quarterly result since the December quarter of 2015, and was below the 0.3% increase the Reserve Bank of New Zealand (RBNZ) were forecasting in it its May monetary policy statement.

“Household basics like rent, food, and electricity all hit consumers’ pockets harder this quarter,” said Jason Attewell, senior manager at Statistics New Zealand (StatsNZ). “Offsetting these price rises were falls in domestic airfares and petrol prices, which fell on average by 4 cents a litre.”

Food prices rose by 0.7% for the quarter, thanks largely to surging costs for vegetables which jumped by 19% from a year earlier.

The flat outcome, well below the 1% increase reported in the March quarter, saw the year-on-year increase fall to 1.7%. That was down on the 2.2% increase reported in the March quarter and missed forecasts for a smaller deceleration to 1.9%.

The RBNZ’s inflation target band is 1-3%.

Source: StatsNZ

StatsNZ said that tradable prices — those impacted by global markets — rose by 0.9% over the year, overshadowed by a 2.4% lift in non-tradable (domestic influenced) prices over the same period.

“Housing and household utilities increased 3.1%, with purchase of new housing up 6.4%,” it said.

Excluding energy and food prices, core inflation — of more importance on the outlook for monetary policy settings — slowed to 1.4%, down from 1.6% in the March quarter.

“Core inflation is still above the low point of 0.9% reached in 2015, but the drop highlights that even decent rates of economic growth aren’t enough to generate much inflation,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics.

Dales says the weak inflation report “should prompt the markets to conclude that interest rates are unlikely to be raised next year”.

“The RBNZ is unlikely to follow in the footsteps of the Fed and the Bank of Canada until it looks as though underlying inflation will be sustained above 2.0%. That probably won’t happen until 2019,” he said.

Economists at the Commonwealth Bank agree with that assessment, noting before the release of the report that “it is likely to be some time before underlying inflation picks up to a level consistent with the RBNZ raising interest rates”.

As a result of the miss, the New Zealand dollar is getting thumped, falling 0.6% against the US dollar to .7269 in recent trade.

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